Working Paper: CEPR ID: DP1019
Authors: Robert J. Barro; N. Gregory Mankiw; Xavier Sala-i-Martin
Abstract: The neoclassical growth model accords with empirical evidence on convergence if capital is viewed broadly to include human investments, so that diminishing returns to capital set in slowly, and if differences in government policies or other variables create substantial differences in steady-state positions. Open economy versions of the theory predict higher rates of convergence than those observed empirically, however. We show that the open economy model conforms with the evidence if an economy can borrow to finance only a portion of its capital, for example, if human capital must be financed by domestic savings.
Keywords: neoclassical growth; capital mobility; convergence
JEL Codes: E13; F21; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| neoclassical growth model (adjusted for partial capital mobility) (O41) | observed rates of convergence in output and income per person (O47) |
| partial capital mobility (F20) | speed of convergence (C69) |
| borrowing constraint (G51) | speed of convergence (C69) |
| ratio of human capital to GDP increases (J24) | overall growth dynamics (O40) |
| initial conditions (C62) | conditional convergence at a rate around 2% per year (F62) |